Still, I think for most markets in the US anyway, buying does make economic sense if you plan to stay in it for several years and enjoy or don't mind taking care of a building, to use peer's phrase.
This calculator is excellent, btw: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
And besides finance you need to consider if you want the responsibility of owning a home. Cutting the grass, shoveling snow, cleaning gutters, fixing things, painting, etc. It's a lot of work.
Owning makes sense for some people but there are a lot of benefits to not having to spend your life taking care of a building.
In the Bay Area at least, a single-bedroom apartment is easily $2000 a month. If you play your cards right, a single-family home in a desirable neighborhood for tech workers or others can be had for under $1m with 4 reasonably-sized bedrooms, a garage, and a yard. You can then rent out 2 of the bedrooms at $1400/month each and end up with your mortgage payment from your tenants each month. There are still maintenance costs and very significant property taxes (~single-tens of thousands per year on such a property), but you also build equity, which you can later sell (minus the mortgage interest). Depending on the mortgage, you could also use this situation to over-pay mortgage payments in order to pay off the property faster and reduce the amount spent on interest if that works out to a better investment opportunity than anything else you could do with the same money (any early payoff penalties included).
It does seem to me that renting is a mixture of paying for convenience and throwing money away, given the above scenario and considering how after 5 years, the home owner ends up with ~$150k in equity assuming the housing market stays flat (it doesn't in the Bay Area, e.g. http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby ) , taxes, maintenance, and interest included, you should still come out ahead with the house. Once you also factor in that renting gets you 8-20%+ increases in rental price per year, while the house value appreciates on the low end of that range over the same amount of time (and also that you can raise the rent for your lodgers accordingly), you really start to see why houses in the Bay Area are attracting foreign investors and starting bidding wars above asking price for nothing-special properties.
Edit: lastly, the point I feel everyone neglects: unlike other investments, your first property has the additional advantage and value that you can live in it, so comparisons to other investments become quite different. Sure, you could take your down payment and put it into ETFs, and on paper the yearly average gains might look similar, but if you suddenly lose your job, the ETFs won't provide a place to sleep at night.
What happens when your renter quits paying rent and starts legal proceedings based on a grievance, real or perceived? Now you cannot sell the house nor are you collecting rents.
Lastly see my other comments. Any investment that pays dividends gives you a place to sleep. The fact that you live in your investment is uniformly a downside, as it hinders liquidity. The fact that you can rent is again not relevant. Most financial investments begin to return a percentage immediately. Renting rooms is just less liquid and more risky than investing in a balanced portfolio.
The Bay Area is but a single market and not representative of all markets. There are many more markets that haven't seen similar growth. The Bat Area is the exception.
If you are paying off a home and you lose your job, if you've leveraged yourself like many home buyers have then you might lose your home! Especially if you lose your job because the economy tanked and home prices have ranked leaving you underwater owing more than the home is worth. And then the bank takes the home back and your entire investment is wiped out. Look to 2009 for an example of this. And rents dropped significantly at that time.
The opportunity cost of tying up a solid down payment needs to be considered too. 200k down could be used in other places too.
I think most people who buy with 20% or less down don't understand how leveraged and dangerous their position is.
Lastly if buying a home was a good way to get rich then we'd have a whole lot more wealthy people.
It's not a bad thing at all and for certain people in certain positions it's a good thing. If you can buy with cash and have at least 40% of your bankroll left afterwards then yeah it makes sense. If you plan on staying in a place forever (laying down roots) and can afford 30% down and still have 2 years of mortgage payments in a cash savings account it makes sense.
I feel like a lot of people buy homes because they just think that's what you do. A home has meaning to a lot of people. But the opportunity costs and risks are large and the rewards are generally a wash with renting long term in most markets with the exception of places that get a 30 year boom or other rare real estate lottery scenarios.
There are ways to win but 10% down and a 30 year mortgage is rarely it.
Two very relevant examples of when the "amortization" argument won't apply:
- a rising market in which the landlord bought a long time ago. Their purchase price was way below the area's current market value. So they can cover their expenses while you still pay less in rent than what a modern-day mortgage would be.
- a home buying market that's expecting continued pricing appreciation. Homeowners can (and will) rent out property at a loss with the expectation it'll be made up in a higher sale value years down the line. Whether or not this actually happens, of course, depends on their ability to accurately predict the future.
There's also the inverse case of declining markets, when landlords can end up over the heads financially and simply can't charge the rates they need to cover their mortgages, because the entire area has turned south.
There are very real financial risks to landlords. They can't just charge whatever they want. It really depends on the state and future of their market.
In your first example, the landlord is amortizing expenses by charging rent above their ownership costs. It doesn't have to be at or higher than then current new mortgage rates.
The second example does happen. However, if the landlord's bet is wrong, and they have the runway to float the extra expenses for a while, they can simply wait for rents to rise and over decades make it back and begin amortizing then. Or they can sell and hope to make it back.
Property owners have many more financial options with their property than do renters.
Regardless, the point is that a lot of people see the mortgage repayments equalling the rent and don't think about the extra costs of ownership.
You are correct that rent != mortgage and shouldn't be compared too close. Renting is a 100% loss, while mortgage is <100% depending on where you are in your repayment plan -- allowing the owner to recoup some of their housing costs after time.
After the mortgage is paid off, the renter still continues to loose 100% of their housing costs while the owner has only care and maintenance (and taxes) of the property to account for.
Under normal market conditions, borrowing money becomes expensive as monetary supply decreases. However, very active central banking systems the last couple decades has changed the story on this.
Over the life of your average 20-25 year mortgage you should expect to have to replace numerous appliances, encounter a couple of catastrophic and unexpected issues (leaking roof, etc.), and after 10 years the decor will be outdated and shabby.
To get optimum resale value you will have to sink a lot of time/money into remodelling (the money you will likely recover, but not the time/effort), then you have the stress of trying to sell the place.
You are also bearing the risk of a downturn in the housing market, and could end up in negative equity.
As a renter you have greater flexibility, much greater certainty over your outgoings, etc.